Do Europe’s Problems Really Impact Us?

Posted by | November 30, 2011

We are constantly being reminded of the economic challenges impacting members of the European Union. It is no surprise that the economic upheaval in Greece and Italy, in particular, are accelerating and impacting other countries worldwide. The prospective impact on the U.S. financial markets could be significant and far reaching, including a potential disruption in the venture and private equity communities.

I believe that in the near term, the EU crisis will influence the U.S. venture and private equity communities in two significant ways:

First, if the U.S. public stock market weakens or remains range bound, the EU economic challenges will have an impact on valuations used to raise capital, as well as in exit transactions. While both valuations will trend lower, the exit market will be more immediately impacted, thus creating a near term imbalance.

Second, certain funds attempting to raise new or additional pools of capital will find new challenges. Funds with a “growth equity” focus will be in a stronger position to raise capital in new funds than will be early stage investors. The rationale—growth equity funds focus capital on companies with more seasoned business models where the ability to grow near term revenue and profits is easier to visualize. Of course, one thing will not change in any market; revenue and earnings growth will remain the core determinants of valuation.

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